Paper P3

Professional Level – Essentials Module

Business Analysis
Wednesday 15 December 2010

Time allowed
Reading and planning: 15 minutes
Writing: 3 hours

This paper is divided into two sections:

Section A – This ONE question is compulsory and MUST be attempted
Section B – TWO questions ONLY to be attempted

Do NOT open this paper until instructed by the supervisor.

During reading and planning time only the question paper may
be annotated. You must NOT write in your answer booklet until
instructed by the supervisor.
This question paper must not be removed from the examination hall.

The Association of Chartered Certified Accountants

 This is a blank page.
The question paper begins on page 3.

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Section A – This ONE question is compulsory and MUST be attempted

The following information should be used when attempting question 1

1 Introduction
Shoal plc is a well-known corporate organisation in the fish industry. It owns 14 companies concerned with fishing and
related industries.
This scenario focuses on three of these companies:
ShoalFish Ltd – a fishing fleet operating in the western oceans
ShoalPro Ltd – a company concerned with processing and canning fish
ShoalFarm Ltd – a company with saltwater fish farms.
Shoal plc is also finalising the purchase of the Captain Haddock chain of fish restaurants.
ShoalFish
Shoal plc formed ShoalFish in 2002 when it bought three small fishing fleets and consolidated them into one fleet.
The primary objective of the acquisition was to secure supplies for ShoalPro. 40% of the fish caught by ShoalFish
are currently processed in the ShoalPro factories. The rest are sold in wholesale fish markets. ShoalFish has recorded
modest profits since its formation but it is operating in a challenging market-place. The western oceans where it
operates have suffered from many years of over-fishing and the government has recently introduced quotas in an
attempt to conserve fish stocks.
ShoalFish has 35 boats and this makes it the sixth largest fleet in the western oceans. Almost half of the total number
of boats operating in the western oceans are individually owned and independently operated by the boat’s captain.
Recent information for ShoalFish is given in Figure 1.
ShoalPro
ShoalPro was acquired in 1992 when Shoal plc bought the assets of the Trevarez Canning and Processing Company.
Just after the acquisition of the company, the government declared the area around Trevarez a ‘zone of industrial
assistance’. Grants were made available to develop industry in an attempt to address the economic decline and high
unemployment of the area. ShoalPro benefited from these grants, developing a major fish processing and canning
capability in the area. However, despite this initiative and investment, unemployment in the area still remains above
the average for the country as a whole.
ShoalPro’s modern facilities and relatively low costs have made it attractive to many fishing companies. The fish
received from ShoalFish now accounts for a declining percentage of the total amount of fish processed and canned in
its factories in the Trevarez area. Recent information for ShoalPro is given in Figure 1.
ShoalFarm
ShoalFarm was acquired in 2004 as a response by Shoal plc to the declining fish stocks in the western oceans. It owns
and operates saltwater fish farms. These are in areas of the ocean close to land where fish are protected from both
fishermen and natural prey, such as sea birds. Fish stocks can be built up quickly and then harvested by the fish farm
owner. Shoal plc originally saw this acquisition as a way of maintaining supply to ShoalPro.
Operating costs at ShoalFarm have been higher than expected and securing areas for new fish farms has been difficult
and has required greater investment than expected. Recent information for ShoalFarm is given in Figure 1.

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All figures in $m
ShoalFish 2007 2008 2009
Turnover of market sector 200·00 198·50 190·00
Turnover of ShoalFish 24·00 23·50 21·50
Gross profit 1·20 1·10 1·05
ShoalPro 2007 2008 2009
Turnover of market sector 40·00 40·10 40·80
Turnover of ShoalPro 16·00 16·20 16·50
Gross profit 1·60 1·65 1·75
ShoalFarm 2007 2008 2009
Turnover of market sector 10·00 11·00 12·00
Turnover of ShoalFarm 1·00 1·10 1·12
Gross profit 0·14 0·14 0·15
Figure 1: Financial data on individual companies 2007–2009
Captain Haddock
The Captain Haddock chain of restaurants was founded in 1992 by John Dory. It currently operates one hundred and
thirty restaurants in the country serving high quality fish meals. Much of Captain Haddock’s success has been built
on the quality of its food and service. Captain Haddock has a tradition of recruiting staff directly from schools and
universities and providing them with excellent training in the Captain Haddock academy. The academy ensures that
employees are aware of the ‘Captain Haddock way’ and is dedicated to the continuation of the quality service and
practices developed by John Dory when he launched the first restaurant. All management posts are filled by recruiting
from within the company, and all members of the Captain Haddock board originally joined the company as trainees. In
1999 the Prime Minister of the country identified Captain Haddock academy as an example of high quality in-service
training. In 2000, Captain Haddock became one of the thirty best regarded brands in the country.
In the past few years, the financial performance of Captain Haddock has declined significantly (see Figure 2) and the
company has had difficulty in meeting its bank covenants. This decline is partly due to economic recession in the
country and partly due to a disastrous diversification into commercial real estate and currency dealing. The chairman
and managing director of the company both resigned nine months ago as a result of concern over the breaking of
banking covenants and shareholder criticism of the diversification policy. Some of the real estate bought during this
period is still owned by the company. In the last nine months the company has been run by an interim management
team, whilst looking for prospective buyers. At restaurant level, employee performance still remains relatively good and
the public still highly rate the brand. However, at a recent meeting one of the employee representatives called for a
management that can ‘effectively lead employees who are increasingly demoralised by the decline of the company’.
Shoal plc is currently finalising their takeover of the Captain Haddock business. The company is being bought for a
notional $1 on the understanding that $15 million is invested into the company to meet short-term cash flow problems
and to improve liquidity. Shoal plc’s assessment is that there is nothing fundamentally wrong with the company and
that the current financial situation is caused by the failed diversification policy and the cost of financing this. The gross
profit margin in the sector averages 10%.
Captain Haddock currently buys its fish and fish products from wholesalers. It is the intention of Shoal plc to look at
sourcing most of the dishes and ingredients from its own companies; specifically ShoalFish, ShoalPro and ShoalFarm.
Once the takeover is complete (and this should be within the next month), Shoal plc intends to implement significant
strategic change at Captain Haddock so that it can return to profitability as soon as possible. Shoal plc has implemented
strategic change at a number of its acquisitions. The company explicitly recognises that there is no ‘one right way’ to
manage change. It believes that the success of any planned change programme depends on an understanding of the
context in which the change is taking place.
Captain Haddock (all figures in $m) 2007 2008 2009
Turnover 115·00 114·50 114·00
Gross profit (loss) 0·20 (5·10) (6·20)
Figure 2: Financial information for Captain Haddock 2007–2009

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Required:
(a) In the context of Shoal plc’s corporate-level strategy, assess the contribution and performance of ShoalFish,
ShoalPro and ShoalFarm. Your assessment should include an analysis of the position of each company in the
Shoal plc portfolio. (15 marks)

(b) Shoal plc explicitly recognises that there is no ‘one right way’ to manage change. It believes that the success of
any planned change programme will depend on a clear understanding of the context within which change will take
place.

(i) Identify and analyse, using an appropriate model, the contextual factors that will influence how strategic
change should be managed at Captain Haddock. (13 marks)
Professional marks will be awarded in part (b)(i) for the identification and justification of an appropriate
model. (2 marks)
(ii) Once the acquisition is complete, Shoal plc wish to quickly turnaround Captain Haddock and return it to
profitability.

Identify and analyse the main elements of strategic change required to achieve this goal. (8 marks)
Professional marks will be awarded in part (b)(ii) for the cogency of the analysis and for the overall
relevance of the answer to the case study scenario. (2 marks)

(c) Portfolio managers, synergy managers and parental developers are three corporate rationales for adding value.

Explain each of these separate rationales for adding value and their relevance to understanding the overall
corporate rationale of Shoal plc. (10 marks)

(50 marks)

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Section B – TWO questions ONLY to be attempted

2 Introduction
TMP (The Management Press) is a specialist business publisher; commissioning, printing and distributing books on
financial and business management. It is based in a small town in Arcadia, a high-cost economy, where their printing
works were established fifty years ago. 60% of the company’s sales are made through bookshops in Arcadia. In these
bookshops TMP’s books are displayed in a custom-built display case specifically designed for TMP. 30% of TMP’s
sales are through mail order generated by full-page display advertisements in magazines and journals. Most of these
sales are to customers based outside Arcadia. The final 10% of sales are made through a newly established website
which offers a restricted range of books. These books are typically very specialised and are rarely featured in display
advertising or stocked by general bookshops. The books available on the website are selected to avoid conflict with
established supply channels. Most of the online sales are to customers based in Arcadia. High selling prices and high
distribution costs makes TMP’s books expensive to buy outside Arcadia.
Business changes
In the last decade costs have increased as the raw materials (particularly timber) used in book production have become
dearer. Paper is extremely expensive in Arcadia and the trees used to produce it are becoming scarcer. Online book
sellers have also emerged who are able to discount prices by exploiting economies of scale and eliminating bookshop
costs. In Arcadia, it is estimated that three bookshops go out of business every week. Furthermore, the influential journal
‘Management Focus’, one of the journals where TMP advertised their books, also recently ceased production. TMP itself
has suffered three years of declining sales and profits. Expenditure on marketing has been reduced significantly in this
period and further reductions in the marketing budget are likely because of the weak financial position of the company.
Overall, there is increasing pressure on the company to increase profit margins and sales.
Despite the poor financial results, the directors of TMP are keen to maintain the established supply channels. One of
them, the son of the founder of the company, has stated that ‘bookshops need all the help they can get and management
journals are the heart of our industry’.
However, the marketing director is keen for the company to re-visit its business model. He increasingly believes that
TMP’s conventional approach to book production, distribution and marketing is not sustainable. He wishes to re-examine
certain elements of the marketing mix in the context of the opportunities offered by e-business.
A young marketing graduate has been appointed by the marketing director to develop and maintain the website.
However, further development of the website has not been sanctioned by the Board. Other directors have given
two main reasons for blocking further development of this site. Firstly, they believe that the company does not have
sufficient expertise to continue developing and maintaining its own website. It is solely dependent on the marketing
graduate. Secondly, they feel that the website will compete with the established supply channels which they are keen
to preserve.
However, the marketing director is convinced that investing in e-business is essential for the survival of TMP. ‘We need
to consider what unique opportunities it offers for pricing the product, promoting the product, placing the product and
providing physical evidence of the quality of the product. Finally, we might even re-define the product itself’. He feels
if the company fails to grasp these opportunities, then one of its competitors will, and ‘that will be the end of us’.

Required:
(a) Determine the main drivers for the adoption of e-business at TMP and identify potential barriers to its
adoption. (5 marks)

(b) Evaluate how e-business might help TMP exploit each of the five elements of the marketing mix (price,
product, promotion, place and physical evidence) identified by the marketing director. (20 marks)

(25 marks)

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3 Introduction
Frigate Limited is based in the country of Egdon. It imports electrical components from other countries and distributes
them throughout the domestic market. The company was formed twenty years ago by Ron Frew, who now owns 80%
of the shares. A further 10% of the company is owned by his wife and 5% each by his two daughters.
Although he has never been in the navy, Ron is obsessed by ships, sailing and naval history. He is known to everyone
as ‘The Commander’ and this is how he expects his employees to address him. He increasingly spends time on his own
boat, an expensive motor cruiser, which is moored in the local harbour twenty minutes drive away. When he is not on
holiday, Ron is always at work at 8.00 am in the morning to make sure that employees arrive on time and he is also
there at 5.30 pm to ensure that they do not leave early. However, he spends large parts of the working day on his boat,
although he can be contacted by mobile telephone. Employees who arrive late for work have to immediately explain the
circumstances to Ron. If he feels that the explanation is unacceptable then he makes an appropriate deduction from
their wages. Wages, like all costs in the company, are closely monitored by Ron.
Employees, customers and suppliers
Frigate currently has 25 employees primarily undertaking sales, warehousing, accounts and administration. Although
employees are nominally allocated to one role, they are required to work anywhere in the company as required by Ron.
They are also expected to help Ron in personal tasks, such as booking holidays for his family, filling in his personal tax
returns and organising social events.
Egdon has laws concerning minimum wages and holidays. All employees at Frigate Ltd are only given the minimum
holiday allocation. They have to use this allocation not only for holidays but also for events such as visiting the doctor,
attending funerals and dealing with domestic problems and emergencies. Ron is particularly inflexible about holidays
and work hours. He has even turned down requests for unpaid leave. In contrast, Ron is often away from work for long
periods, sailing in various parts of the world.
Ron is increasingly critical of suppliers (‘trying to sell me inferior quality goods for higher prices’), customers (‘moaning
about prices and paying later and later’) and society in general (‘a period working in the navy would do everyone
good’). He has also been in dispute with the tax authority who he accused of squandering his ‘hard-earned’ money.
An investigation by the tax authority led to him being fined for not disclosing the fact that significant family expenditure
(such as a holiday for his daughters overseas) had been declared as company expenditure.
Company accountant
It was this action by the tax authority that prompted Ron to appoint Ann Li as company accountant. Ann had previously
worked as an accountant in a number of public sector organisations, culminating in a role as a compliance officer in
the tax authority itself. Ron felt that ‘recruiting someone like Ann should help keep the tax authorities happy. After all,
she is one of them’.
Ann was used to working in organisations which had formal organisational hierarchies, specialised roles and formal
controls and systems. She tried to install such formal arrangements within Frigate. As she said to Ron ‘we cannot
have everyone working as if they were just your personal assistants. We need structure, standardised processes and
accountability’. Ron resisted her plans, at first through delaying tactics and then through explicit opposition, tearing up
her proposed organisational chart and budget in front of other employees. ‘I regret the day I ever made that appointment’,
he said. After six months he terminated her contract. Ann returned to the tax authority as a tax inspector.

Required:
The cultural web allows the business analyst to explore ‘the way things are done around here’.
(a) Analyse Frigate Ltd using the cultural web or any other appropriate framework for understanding organisational
culture. (15 marks)

(b) Using appropriate organisation configuration stereotypes identified by Henry Mintzberg, explain how an
understanding of organisation configuration could have helped predict the failure of Ann Li’s proposed
formalisation of structure, controls and processes at Frigate Ltd. (10 marks)

(25 marks)

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4 Introduction
The Institute of Administrative Accountants (IAA) has a professional scheme of examinations leading to certification.
The scheme consists of six examinations (three foundation and three advanced) all of which are currently assessed
using conventional paper-based, written examinations. The majority of the candidates are at the foundation level and
they currently account for 70% of the IAA’s venue and invigilation costs.
There are two examination sittings per year and these sittings are held in 320 centres all over the world. Each centre is
administered by a paid invigilation team who give out the examination paper, monitor the conduct of the examination
and take in completed scripts at the end. Invigilators are also responsible for validating the identity of candidates
who must bring along appropriate identification documents. At over half of the centres there are usually less than ten
candidates taking the foundation level examination and no candidates at all at the advanced level. However, the IAA
strives to be a world-wide examination body and so continues to run examinations at these centres, even though they
make a financial loss at these centres by doing so.
Recent increases in invigilation costs have made the situation even worse. However, the principles of equality and
access are important to the IAA and the IAA would like to increase the availability of their examinations, not reduce
it. Furthermore, the IAA is under increased financial pressure. The twice-yearly examination schedule creates peaks
and troughs in cash flow which the Institute finds increasingly hard to manage. The Institute uses its $5m loan and
overdraft facility for at least four months every year and incurred bank charges of $350,000 in the last financial year.
Examinations
All examinations are set in English by contracted examiners who are paid for each examination they write. All
examinations are three-hour, closed-book examinations marked by contracted markers at $10 per script. Invigilators
send completed scripts directly to markers by courier. Once scripts have been marked they are sent (again by courier)
to a centralised IAA checking team who check the arithmetic accuracy of the marking. Any marking errors are resolved
by the examiner. Once all marks have been verified, the examination results are released. This usually takes place
16 weeks after the examination date and candidates are critical of this long delay. The arithmetic checking of scripts
and the production of examination results places significant demands on IAA full-time administrative staff, with many
being asked to work unpaid overtime. The IAA also employs a significant number of temporary staff during the results
processing period.
E-assessment
The new head of education at the IAA has suggested e-assessment initiatives at both the foundation and advanced
levels.
He has suggested that all foundation level examinations should be assessed by multiple-choice examinations delivered
over the Internet. They can be sat anytime, anyday, anywhere. ‘Candidates can sit these examinations at home or at
college. Anywhere where there is a personal computer and a reliable broadband connection.’
Advanced-level examinations will continue to be held twice-yearly at designated examination centres. However,
candidates will be provided with personal computers which they will use to type in their answers. These answers will
then be electronically sent to markers who will use online marking software to mark these answers on the screen.
The software also has arithmetic checking facilities that mean that marks are automatically totalled for each question.
‘100% arithmetic accuracy of marking is guaranteed.’
He has also suggested that there is no need to make a formal business case for the adoption of the new technology.
‘Its justification is so self-evident that defining a business case, managing benefits and undertaking benefits realisation
would just be a pointless exercise. It would slow us down at a time when we need to speed up.’

Required:
(a) Evaluate the perceived benefits and costs of adopting e-assessment at the IAA. (15 marks)

(b) Explain why establishing a business case, managing benefits and undertaking benefits realisation are essential
requirements despite the claimed ‘self-evident’ justification of adopting e-assessment at the IAA.
(10 marks)

(25 marks)

End of Question Paper